CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
has successfully defended a number of these failure-to-close cases in various courts and has settled and resolved
other such cases and disputes.
Regarding royalty claims, Chesapeake and other natural gas producers have been named in various lawsuits
alleging royalty underpayment. The suits against us allege, among other things, that we used below-market prices,
made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates
that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL. Plaintiffs
have varying royalty provisions in their respective leases, oil and gas law varies from state to state, and royalty owners
and producers differ in their interpretation of the legal effect of lease provisions governing royalty calculations. The
Company has resolved a number of these claims through negotiated settlements of past and future royalties and has
prevailed in various other lawsuits. We are currently defending lawsuits seeking damages with respect to royalty
underpayment in various states, including, but not limited to, Texas, Pennsylvania, Ohio, Oklahoma, Kentucky, Louisiana
and Arkansas. These lawsuits include cases filed by individual royalty owners and putative class actions, some of
which seek to certify a statewide class. The Company also has received DOJ, U.S. Postal Service and state subpoenas
or information requests seeking information on the Company’s royalty payment practices.
Chesapeake is defending numerous lawsuits filed by individual royalty owners alleging royalty underpayment
with respect to properties in Texas. These lawsuits, organized for pre-trial proceedings with respect to the Barnett
Shale and Eagle Ford Shale, respectively, generally allege that Chesapeake underpaid royalties by making improper
deductions, using incorrect production volumes and similar theories. Chesapeake expects that additional lawsuits will
continue to be pursued and that new plaintiffs will file other lawsuits making similar allegations.
On December 9, 2015, the Commonwealth of Pennsylvania, through the Office of Attorney General, filed a lawsuit
in the Bradford County Court of Common Pleas related to royalty underpayment and lease acquisition and accounting
practices with respect to properties in Pennsylvania. The lawsuit, which primarily relates to the Marcellus Shale and
Utica Shale, alleges that Chesapeake violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law
(UTPCPL) by making improper deductions and entering into arrangements with affiliates that resulted in underpayment
of royalties. The lawsuit includes other UTPCPL claims and antitrust claims, including that a joint exploration agreement
to which Chesapeake is a party established unlawful market allocation for the acquisition of leases. The lawsuit seeks
statutory restitution, civil penalties and costs, as well as temporary injunction from exploration and drilling activities in
Pennsylvania until restitution, penalties and costs have been paid and permanent injunction from further violations of
the UTPCPL. Chesapeake has filed preliminary objections to the most recently amended complaint.
Putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania have
been filed on behalf of royalty owners asserting various claims for damages related to alleged underpayment of royalties
as a result of the Company’s divestiture of substantially all of its midstream business and most of its gathering assets
in 2012 and 2013. These cases include claims for violation of and conspiracy to violate the federal Racketeer Influenced
and Corrupt Organizations Act and for an unlawful market allocation agreement for mineral rights. One of the cases
includes claims of intentional interference with contractual relations and violations of antitrust laws related to purported
markets for gas mineral rights, operating rights and gas gathering sources.
We believe losses are reasonably possible in certain of the pending royalty cases for which we have not accrued
a loss contingency, but we are currently unable to estimate an amount or range of loss or the impact the actions could
have on our future results of operations or cash flows. Uncertainties in pending royalty cases generally include the
complex nature of the claims and defenses, the potential size of the class in class actions, the scope and types of the
properties and agreements involved, and the applicable production years.
The Company is also defending lawsuits alleging various violations of the Sherman Antitrust Act and state antitrust
laws. In 2016, putative class action lawsuits were filed in the United States District Court for the Western District of
Oklahoma and in Oklahoma state courts, and an individual lawsuit was filed in the United States District Court of
Kansas, in each case against the Company and other defendants. The lawsuits generally allege that, since 2007 and
continuing through April 2013, the defendants conspired to rig bids and depress the market for the purchases of oil
and natural gas leasehold interests and properties in the Anadarko Basin containing producing oil and natural gas
wells. The lawsuits seek damages, attorney’s fees, costs and interest, as well as enjoinment from adopting practices
or plans which would restrain competition in a similar manner as alleged in the lawsuits.